Accounting Conservatism, IPO Underpricing, and Post-issue Stock Performance of Indian SMEs

Abstract

This study aims to investigate the influence of accounting conservatism on the underpricing phenomenon observed in Initial Public Offerings (IPOs) of small- and medium-sized enterprises (SMEs) in India. For this investigation, the study specifically focuses on two major dimensions of conservatisms, namely, conditional conservatism and unconditional conservatism. The sample for this investigation consists of 254 SMEs that underwent IPOs between 2013 and 2022 and subsequently got listed in the NSE Emerge Index. Employing a multivariate regression analysis, the findings indicate a significant and negative association between both conditional and unconditional conservatism and IPO underpricing in the SME market. This result implies that the adoption of conservative accounting practices plays a prominent role in curtailing the underpricing tendencies observed in SME offerings. Furthermore, an investigation of long-term IPO performance using a buy-and-hold abnormal return approach indicates that the presence of conditional conservatism positively impacts IPO performance in the long run. Conversely, unconditional conservatism is found to have a detrimental effect on the long-term performance of SME IPO issues. Overall, the outcomes demonstrate that investors stand to gain from informative financial statements that result from the adoption of conservatism. However, it is critical that conservatism is selectively applied to avoid excessive understatement of firm value. The study findings highlight the nuanced relationship between accounting conservatism and IPO performance and offer valuable insight that can benefit firm managers, underwriters, and lead managers involved in the IPO process.